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Treasuries on Firmer Footing

25 May 2017 by Mark Holman

We had an interesting debate on Treasury yields during our investment committee yesterday. For those that have followed our rates view, we had generously given ourselves a year-end target for the 10 year note of between 2.75% and 3.00%, meaning that holding longer dated treasuries, for anything other than short term tactics, would likely produce a loss in 2017. However, our view has softened slightly given the data, particularly around inflation or rather the lack of “reflation”, which has moved our thinking on Treasuries. The most likely scenario for us is that the high point for 2017 yields is already behind us, when we touched 2.63% back on March 13th.

With that in mind, much of the potential downside for 2017 in respect of owning Treasuries is already mitigated at a yield of 2.25%, but the risk-off qualities of course remain. Our rationale for the more limited downside is based around softer inflation data, a progressive rate hiking policy (2 more in 2017), a logical and pragmatic approach to balance sheet reduction by the Fed, and a reality check on the policies that will actually be put through congress this year.

We do still think that there will be an upward bias to yields beyond 2017 and that yields will most likely be higher than they are now by year end, however, the runaway downside has been capped out and this should begin to attract investors who must be discussing booking profits on parts of their portfolios as valuations become stretched.

We are not buying just yet, but will use any weakness in Treasuries to gain exposure.

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